What Are You Forgetting?

Reviewing Commonly Overlooked Fiduciary Duties

In today’s environment, the task of being retirement plan fiduciaries can be quite overwhelming and covering all the bases at times seems nearly impossible. That’s understandable, considering the comprehensive scope of fiduciary responsibility, as well as the dynamic nature of the retirement plan designs, investment management, and legal interpretations of fiduciary duty.  Try to avoid some of the common pitfalls such as: (1) failing to identify the plan’s fiduciaries, (2) insufficiently training fiduciaries, and (3) spending excessive time on inappropriate investments.

Knowing Your Fiduciaries

Can you identify all of your plan fiduciaries? Fiduciaries should know those who bare equal responsibility. Acknowledging having fiduciary status and the associated liability is a powerful motivator toward recognizing the importance of paying careful attention to the management of the retirement plan. However, the scope of your fiduciary duty varies according to your designated role. Here are some examples of the types of plan fiduciaries:

Named fiduciaries. ERISA requires the appointment of named fiduciaries. The plan document identifies the corporate entity or individual serving as the named fiduciary. If they aren’t immediately identified, the plan document will set the requirements for naming them. The named fiduciary can designate and give instructions to plan trustees.

Plan trustees. These are people who have exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary. These plan fiduciaries have a broad scope of responsibility.

Board of directors and committee members. ERISA considers individuals — typically the corporate board of directors, who appoint plan trustees and administrative committee members — fiduciaries. The scope of their fiduciary duty focuses on how they fulfill that specific function, exclusive of other functions within the plan itself. The law also sees as fiduciaries, people who exercise discretion in key decisions about plan administration, including members of an administrative committee, if such a committee exists.

Investment advisors. The named fiduciary can appoint one or more investment managers for the plan’s assets. People or firms who manage plan assets are plan fiduciaries. However, individuals employed by third party service providers can fall into different fiduciary categories. The investment manager who has complete discretion over plan asset investments (known as an ERISA 3(38) fiduciary) has the greatest fiduciary responsibility.

In contrast, a corporation or individual who offers investment advice, but is not a decision maker (an ERISA 3(21) fiduciary), has a lesser fiduciary responsibility. The advice can be about investments or the selection of the investment manager.

Service providers. If you use service providers, be sure the service agreement clearly specifies when a service provider is acting in a fiduciary capacity.

Anyone who exercises discretionary authority over any vital facet of plan operations falls under a catch-all category of a “functional fiduciary.”

Training Your Fiduciaries

Given the critical role fiduciaries play, they must be properly trained for their assigned duties. This training is often neglected and can be of particular concern for company employees who don’t have full-time jobs related to administering the plan.

If a fiduciary is not properly trained to carry out their role, this alone may represent a fiduciary breach on the part of the other fiduciaries responsible for selecting them. During the U.S. Department of Labor’s reviews of plan’s operations they have been known to focus on this. Procedurally, have named fiduciaries (such as individually named trustees or members of plan committees) accept in writing their role as a fiduciary.

Providing Proper Insurance

Another important task is properly protecting your plan’s fiduciaries against costly litigation and penalties with insurance designed for this purpose. Companies generally cover fiduciaries who also serve as corporate directors or officers, through directors and officers, or employment practices insurance policies. These generally don’t extend to fiduciary breaches.

ERISA fidelity bonds protect the plan’s assets from theft or fraud, but not from fiduciary breaches. ERISA requires a fidelity bond, but not fiduciary liability insurance. However, given that anyone who is a fiduciary is personally liable for any violation of their fiduciary duties, you should have fiduciary liability coverage, often called an ERISA rider.

Focusing on the Wrong Investments

Be wary of retirement fund investment alternatives that focus on narrow sectors and strategies.  Stock market volatility and speculation about changes in Federal Reserve policies (and their resulting financial market impact) can divert the fiduciaries’ attention from the investment options where most of their participants are investing the majority of their retirement savings — stable value and target date funds (“TDFs”).

Neglecting the Big Picture

The basic premise is that retirement plans should prepare employees for retirement. Fiduciaries with broad responsibility for plans that ignore the big picture, ultimately are failing participants, and possibly making themselves vulnerable to a charge of breach of their fiduciary duties. Reviewing the common mistakes regularly can help you avoid making them.

© 2015

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